Competitiveness, Protectionism, and the WTO

John Maynard Keynes’s ghost casts a shadow over the current financial crisis. His prescriptions for the Great Depression consisted essentially of sustained fiscal stimulus and protection from imports in order to retain that stimulus within the domestic market.

These prescriptions were badly suited to the last global economic crisis of the 1970s, which was characterised by inflation and stagnation with the former aggravated by Keynesian demand stimulus. That crisis generated two connected intellectual responses, which are relevant today: Milton Friedman’s monetarist revolution; and Mancur Olson’s theory of special interest groups and how their accumulated actions generate structural economic rigidities that weigh an economy down.

Friedman’s intellectual revolution currently seems to be in the most trouble, as western central banks pump liquidity into their economies seemingly with little effect on growth or inflation. Conventional wisdom about what constitutes ‘good’ monetary policy is consequently in flux.

But Olson’s seminal ideas retain their vitality. For example, they can be used to explain the rise of financial interests in the west, particularly the US, and the subsequent difficulties in pursuing real reforms. The slow pace of those reforms places undue pressure on monetary policies to do the heavy lifting.

Olson’s ideas are particularly relevant to building and sustaining competitiveness in an economy. The more interest groups accumulate, the more they secure special privileges, exclude outsiders, and over time – like barnacles weigh down a ship – economic vitality is undermined. Therefore, Olsen argued it is essential for nations to be open to international trade and investment, as this would undermine the power of domestic lobbies and inhibit the accumulation of domestic structural rigidities.

This logic was very powerful in the 1980s and 1990s, as the multilateral trading system achieved significant advances culminating in the establishment of the World Trade Organization (WTO). The impact of these liberalization processes is still debated and to some is a matter of theology, but to my mind they were mostly beneficial to developing and developed economies alike.

Yet significant pockets of protection remained entrenched after the conclusion of the Uruguay Round of trade negotiations in 1994. These concern developed country agriculture, but also developing country industrial tariffs and access to services markets worldwide. The Doha Development round, notwithstanding its branding, was supposed to address these.

Since the Doha round is stalled, perhaps fatally, it is unlikely these issues will be addressed. Some argue this means the WTO is a victim of its own success since much structural protection has been removed from the system, but this ignores the reality that significant pockets of protection remain. And in the wake of the financial crisis special interest groups are reasserting themselves.

The WTO Secretariat finds that approximately 3 percent of global trade has been affected by new trade restrictions since 2008. These measures take 3 primary forms: anti-dumping duties, tariff increases, and export restrictions. G20 members, including South Africa, have imposed most new trade restrictions, affecting approximately 4 percent of their trade. Not surprisingly WTO trade disputes are on the rise, with 19 initiated this year – the most since the crisis began in 2008 (in that year 18 cases were initiated).

Since there is very little prospect of the Doha round being concluded anytime soon, these trends are starting to become worrisome. Whilst the WTO’s dispute settlement mechanism is clearly working, the underlying political economy is changing. As the rise of China recalibrates global trade relations for how much longer will the great powers, especially the US, continue to respect the system? What if Europe actually does disintegrate?

Preferential trade agreements (PTAs) remain the default option, and are proliferating with approximately 320 actively in force. This proliferation greatly complicates the trading system, as each PTA has its own tariff preference schedules and associated rules, corresponding to the mosaic of special interests behind the negotiation in question. Furthermore, PTAs are by their nature discriminatory as non-signatories cannot benefit from the preferences.

On the plus side PTAs do liberalize trade. More good news is that, according to the joint OECD/UNCTAD investment monitoring reports G20 members, particularly developing countries, liberalized their investment environments substantially more than they imposed restrictions during the crisis period.

These contradictory signals reinforce the point that the liberalization/protection balance remains uneasy. Whilst the WTO has provided a significant bulwark against the broader spread of protectionism, this cannot be taken for granted particularly in the event of another major financial meltdown.

In this light the argument for concluding the Doha round remains as strong as ever. Unfortunately the politics do not look favourable, particularly in the US, which remains the indispensible player even if the degree of indispensability is diminishing. With the US election season now well underway it is worth asking which Presidential candidate would be best for the trading system?

South Africa’s record in all this is mixed. According to WTO data in 2008 no new measures were implemented. In 2009 there was a flurry of tariff changes affecting 359 tariff lines mostly in the clothing and textiles sectors, with two thirds being ostensibly liberalizing measures; and 22 anti-dumping duties were not renewed. On the face of it a liberal year, at the height of the crisis. There was little activity in 2010; an uptick in 2011 with more liberalizing measures than restrictions; and 2012 represented a major acceleration in restrictions with the introduction of government’s preferential procurement programme. Since 2008 two disputes were brought against South Africa, both relating to anti-dumping duties: Indonesia, subsequently settled; and recently Brazil, subject to consultations.

On the inward investment front, notwithstanding the drama surrounding the Walmart case the government has on balance reduced restrictions. Most recently the Reserve Bank reduced restrictions on foreign exchange transactions and Treasury relaxed dividends taxes for foreign residents.

So despite the rhetoric to the contrary South Africa remains a relatively good international citizen. At a time when there is much uncertainty regarding the direction of domestic economic policy that is good news indeed. Will this stance survive the bracing winds emanating from our trading partners, and the domestic political vortices contending for power? That is the key question.